A Report Card for Asia's 'Axis of Reform'

One year ago, after Narendra Modi's election as prime minister of India, I explored how Asia's biggest economies were suddenly in the hands of leaders pledging huge economic reforms. Like Modi, Japan's Shinzo Abe and China's Xi Jinping were promising to deliver big changes. How have things fared since then for Asia's "Axis of Reform"?

Not very well, unfortunately. "Progress on reform across Asia remains frustratingly slow," says economist Frederic Neumann of HSBC in Hong Kong. Although Modi, Abe and Xi each seem to have properly diagnosed the problems facing their countries, their policy responses are still more rhetoric than reality. Let's consider each individually.

Modinomics: Modi has pulled off few major legislative victories since the euphoria of his May 2014 election. The ambitions of Modi's Bharatiya Janata Party seem to have been hemmed in by the sheer day-to-day difficulty of managing a vast nation of 1.2 billion people. His bold plans to create a national sales tax and liberalize key sectors like retail were replaced by small-target wins -- cutting red tape for companies, upping foreign investment in defense, and insurance and bank accounts for the poor. It has been a far cry from the liberalizing “Reagan-Thatcher” moment banks like BNP Paribas had predicted after Modi's election.

Still, judging purely from results, India's prime minister has been the most impressive of his peers. Just two years ago, India's economy seemed headed for junk status. Today, it is on a path to achieving 8 percent growth. That could provide Modi with the momentum he needs to pass further reforms and make India one of the world's leading economies.

There's another reason to be optimistic about Modi: his partner in reform at the Reserve Bank of India, Raghuram Rajan. Unlike the the central bankers of other countries, who have enabled complacent politicians by lowering borrowing costs, Rajan has stayed firm. It's true that the prime minister still needs to take bolder action. For now, though, I'll give him a grade of B.

Abenomics: In December, Prime Minister Abe successfully arranged an early election to win a new mandate for his three-pronged economic revival strategy. Five months on, Abe has carved out plenty of time to tweak defense laws to allow Japanese troops to fight overseas. But he's expended little energy battling Japan's excess of business regulations, retrograde tax code, high trade barriers or impediments to entrepreneurship and increased productivity.

In truth, since taking office two-and-a-half years ago, Abe has only truly fired one of his economic program's three so-called "arrows" -- monetary easing. The Bank of Japan has managed to weaken the yen by 30 percent, which has boosted the Nikkei stock exchange. But the flight of Abe's second arrow -- fiscal expansion -- was curtailed prematurely when Tokyo raised sales taxes in April 2014, which triggered a recession and made companies less inclined to raise wages. Meanwhile, the third and most important arrow -- structural reform -- has never left the quiver, says Richard Katz of the New York-based Oriental Economist Report. The BOJ's largess, he says, has been a "narcotic to avoid making needed changes.” As a result, Abenomics gets a C-, at best.

Xiconomics: Xi has undertaken the most difficult challenge of all: a vast effort to shift China's economy away from excessive investment and exports and toward services. And he has made some progress. By purging corrupt officials, Xi has set a new tone in Beijing. He has also allowed some companies to default and clamped down on excessive borrowing.

But Xi has shown little sign he will tolerate the sort of sharp slowdown that would have to accompany any national economic realignment. What's more, he seems to be emulating the Japanese government's worst habits by papering over the country's most troubling economic cracks. Xi's plan to address mushrooming China's local-government-debt -- which is now larger than the entire German economy -- is to have the country's central bank arrange to swap it for fresh loans. That should be called what it is: pretending the problem doesn't exist.

Xi's aggressive censorship campaign suggests he's more interested in taking down personal rivals than purging the Communist Party's worst impulses. And his plans to give markets a "decisive" role in the economy, rein in state-owned enterprises, curb shadow banking and unleash a startup boom are simply too vague to judge. For now I'll give him a C+.

It's not that the past year's events in New Delhi, Tokyo and Beijing don't show some signs of promise. But there's not yet enough tangible progress to justify those governments' outsized reputations for ambition. Tomorrow I'll offer report cards on three other Asia reform stories: Korea, the Philippines and Indonesia. Perhaps those countries will comprise Asia's real "Axis of Reform."

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.